Lease payments are based on the car’s starting value, known as the Selling Price. By the time your lease ends, the car will have a Residual Value, which is what the dealership expects it to be worth when you return it. Your payments mostly cover the difference between these two amounts, which is called Depreciation—essentially, how much value the car loses during your lease.
Other factors can also affect your monthly payments, either increasing or lowering them. Below, we’ll break down the main elements that influence what you pay.
The Selling Price of the vehicle comes from the usual negotiations you have with a dealership when buying a car to determine how much you would buy it for. They usually involve the following:
This helps determine the vehicle's final Selling Price before tax is included. It is generally used as the foundation for the other factors below.
The Residual Value and the Depreciation of the vehicle are closely tied together. Before you sign the lease, the leasing company determines both using historical data for that make and model and future projections. The Residual Value represents how much the car is worth at the end of the lease, and the Depreciation represents how much value the vehicle lost by the time the lease ends.
How to Determine Lease Price
The lease price of a vehicle is determined using its Selling Price, Residual Value, and Depreciation. Here is a basic rundown of how they work to determine your lease payment.
It is essential to remember that the Residual Value and Depreciation are determined before you lease the vehicle, not after the lease is over. They are both set using historical data from previous versions of the same model and forecasting future trends. Other factors considered include reliability, the cost and frequency of repairs and parts, fuel economy, size, condition, mileage, consumer trends in desirability, etc.
Some leasing companies will ask you to make a down payment towards the lease, lowering your lease payments. The bigger the down payment, the lower your monthly payments will be. However, this does not necessarily save you money in the long run. Usually, a down payment is divided by the number of months in the lease, which lowers the monthly payments by around that amount.
It can be a viable option if you have the money upfront and want to get that much out of the way for the future. However, the down payment is still taxable, so check how that affects the monthly payments to see if it saves or costs you any money. Whether you prefer to make a down payment depends on your preferences and circumstances.
Alternatively, if you already own a car you want to sell, you can trade it to the dealer. It acts similar to a down payment but uses your old vehicle’s value instead of the cash you have to have saved up. You can then use the trade-in value to reduce the taxable leased amount you must pay, reducing your monthly payment. This only works for your vehicle, as you cannot trade in leased cars.
Leases usually are between three and four years (36 to 48 months) long but can be as short as two years and as long as five. How long of a lease you choose will affect your monthly lease payments; generally speaking, the longer the lease, the lower your monthly payments. Here are the main things to consider when it comes to longer leases:
You can look up depreciation and lease calculators for models you are interested in to see whether a longer lease would be better, but don’t sign a lease until you are sure it makes sense for you.
Leases generally limit how much you can drive the leased vehicle per year, with additional payments as penalties if you surpass it. This is because the amount driven affects Depreciation, so more kilometres on the odometer will cause it to be worthless. Since the Depreciation for the leased vehicle is set at the start to determine your payments, it will be based on a forecasted amount driven over the lease term.
For someone who lives in Toronto and doesn’t drive much outside the city, staying below this limit should not be difficult. But those who live in suburban areas like Mississauga or more rural areas and need to use their car for greater distances are more likely to surpass the limit number.
Most leases require you to make a security deposit that is usually around the worth of one month’s lease payment. You effectively pay down one month’s payment in advance that the leasing company will use in case you fail to make a payment or against damage caused to the car. But don’t worry, you get the security deposit back at the end of the lease, as long as the car is in good condition.
Understanding how car lease payments are calculated helps you make informed decisions and potentially save money. Your payments are influenced by factors like the car’s selling price, depreciation, residual value, and additional considerations like down payments, lease length, and kilometre limits. Knowing these details allows you to tailor your lease to fit your budget and driving habits. With the tips shared in this guide, you’re better equipped to navigate lease negotiations and keep your costs manageable. Do your research, ask questions, and enjoy the experience of leasing your next car!
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